Wall Street reform pains Main Street banks

Congressional lawmakers on Friday reached agreement on a sweeping reform of U.S. financial regulation. But don’t expect local community bankers to be impressed.

“Honestly, Congress can do better,” Don Childears, president and CEO of the Colorado Bankers Association, said on Friday. “They talk about this being a Wall Street reform bill, but in many ways they have exempted the firms on Wall Street and have really clobbered the institutions that are already regulated, the Main Street banks.”

The most-publicized aspects of the bill apply to very large banks, almost none of which are based in Colorado (although many have branches here). They’ll have to spin off certain derivatives trading, for instance, and restrict trading for their own benefit.

But bankers say other provisions will affect everyone, and that the pain will be worse for community banks because of their relatively smaller size.

For instance, the compromise legislation, which is expected to be voted on by both houses of Congress next week, would create a new Consumer Financial Protection Bureau with oversight over mortgage originators, payday lenders and banks with more than $10 billion in assets (auto dealers won an exemption).

Only one Colorado-based bank meets that asset level — Lakewood-based FirstBank Holding Co. But bankers believe that whatever rules are made for the larger banks eventually will apply to all banks, saddling small banks with even more paperwork and restrictions.

“Those entities regulated by insurance regulators, the Securities and Exchange Commission, state securities regulators and specific entities like auto dealers are all exempted from it, which is really ironic,” Childears said. “But the banks that have always had pretty good financial protection and good disclosures just get another layer slapped on them.”

Here are a few other provisions that will affect community banks and credit unions:

• Interchange fees

The reform bill allows the Federal Reserve to restrict interchange fees, or the “swipe fees” that credit card companies charge merchants each time a customer uses a debit card for a purchase.

Although the new rule applies only to cards issued by big banks, community banks and credit unions staunchly oppose it, because they believe smaller issuers will be forced to lower their fees if they want to continue to do business with the big card issuers. Eventually, those costs likely will be passed on to consumers, they say.

“If you’re paying nothing for a debit card now, you’ll probably start seeing fees for the maintenance of that card,” Childears said. “If you happen to have a card that earns reward points, you’ll probably see those go away. And because that income was used to provide things like low-cost basic banking services, used especially by low-income people, ... those services will start to have increased fees attached to them, as well.”

The proposal “will fail in any way to adequately account for the significant operational costs and losses incurred by community banks due to fraud and merchant data breaches,” Independent Community Bankers of America Chairman Jim MacPhee and President and CEO Camden Fine said in a statement on Friday. “Now is not the time to change a proven interchange system just so big-box merchants can reap higher profits and pass their costs of doing business on to America’s consumers.”

• Trust-preferred securities as capital

Smaller banks did get some relief on the issue of whether they can continue to count trust-preferred securities in their Tier 1 capital, which regulators use to gauge the bank’s ability to withstand losses. Over the past decade, hundreds of U.S. banks have issued at least $130 billion in trust-preferred securities, which are currently supporting about $1.3 trillion in loans, according to American Bankers Association estimates.

The compromise would “grandfather” trust-preferred securities for banks with less than $15 billion in assets, meaning that Colorado banks can continue to treat as Tier 1 capital any trust-preferred securities issued as of May 19, Childears said. Larger banks have five years to phase them out of Tier 1 capital.